Lululemon shares hit by lack of clear growth outlook

April 21, 2014|Solarina Ho | Reuters

TORONTO (Reuters) - Lululemon Athletica Inc shares slumped as much as 7.4 percent to the lowest in nearly month on Monday as analysts worried about the premium Canadian yogawear retailer's growth prospects following its analyst day presentation last week.

"We came away from these meetings with the distinct impression of a company losing focus," Credit Suisse's Christian Buss said in a research note after the presentation. "... this seems inappropriate for a brand that has faced significant product flow, quality, and brand communication challenges."

Some analysts also expressed disappointment at the lack of mid- and long-term guidance from a company still trying to find its footing after a year that included a high-profile recall, the departure of top level executives, and remarks by Chairman Dennis "Chip" Wilson that some women's figures "just actually don't work" with Lululemon's clothing.

"We, and we think many investors, would have liked to hear much more concrete details regarding the company's business analysis and plans," Faye Landes, an analyst with Cowen and Co, told clients, adding that there was no "compelling reason to jump into Lulu right now."

The Vancouver-based company, which opened its first European store in London earlier this month, is eyeing global growth, adding more casual apparel lines, and expanding its menswear products, a segment Lululemon believes could eventually generate $1 billion in sales.

Lululemon has said 2014 is an investment year, as it beefs up its infrastructure and supply chain to address last year's quality control issues. The retailer had previously said supply chain woes would likely not be fully smoothed out until 2015.

The company is looking to open standalone men's stores in coming years. It said last week it was about two-thirds of the way toward achieving its target of having some 300 U.S. stores, and could meet it in the next three to four years.

"Even if Lululemon can return to the heights of 2012 once again, that likely will not occur until 2016," Sterne Agee analyst Sam Poser said in a research note.

Competition is growing in a niche market Lululemon created, and its executives have acknowledged that the company is "not the only game in town anymore.

Last week's presentation was also the first major opportunity for the market to hear from new top-level executives, including Laurent Potdevin, who took over as chief executive in January.

Analysts were generally positive about the new leadership team at Lulu, while some said it was too early for the company to offer details on its outlook.

"Given the new members of management coupled with the turbulence the business has withstood in the past year, longer term targets are more likely to come after a solid base of infrastructure is in place, likely in 2015 at the earliest," Canaccord Genuity analyst, Camilo Lyon, said in a client note.

Lululemon shares were down 6.3 percent at $48.45 on the Nasdaq late Monday afternoon, after falling to $47.91, the lowest since March 25.

Mark Altschwager of Baird & Co said the skepticism over Lululemon's turnaround makes it "nice entry point for patient investors."